Business Outlook: Four Scary Scenarios For Food Retailers

Mother Nature took the economy off the front pages in late summer for a week of earthquakes and storms, but now we've returned to familiar topics. Once again there are gathering business clouds that may continue to darken. The annual SN Financial Analysts Roundtable, which appears in this issue (see No Relief in Sight), points to potential pitfalls, including these:

A worsening economic/employment picture. Employment numbers are going in the wrong direction, and some experts are questioning if we're in a recovery or a recession. The biggest concern is what happens by next year if things continue to worsen.

Further advances in food-cost inflation. One analyst forecast packaged food inflation of 5% to 8% in the latter half of 2011, as price hikes increasingly extend from perishables to all categories. This gives pause to retailers planning to pass along hikes.

Challenges for private label. Will store-label programs become less of a safety net for retailers? That's the opinion of at least one financial analyst, who believes retailers are getting closer to maxing out on growth potential.

A competitive landscape that could become “less rational.” Believe it or not, we've been in a “rational” competitive environment marked by a lack of price wars. But that could all change very soon, analysts say.

What to do? It would be nice if there were easy answers, but there aren't.

Mostly it's a game of watching how things develop and continually reevaluating game plans.

A faltering economy means refocusing on a recession-like strategy of value and deals to blunt the inevitable trading down by consumers. Higher cost inflation requires revisiting strategies of how much to pass along, decisions that can't be made in a bubble because, as analysts point out, competitors' strategies will vary.

Meanwhile, private-label challenges, if they develop in a meaningful way, would necessitate a retooling of own-brand growth strategies and a reconsideration of the optimal target mix between private labels and brands. Finally, if price wars heat up, a good approach is to stay reasonably competitive while stressing uniqueness of format and merchandising mix.

A select few companies — those running their businesses exceedingly well or catering to higher-income clientele — will be sheltered from the biggest impacts of these hurdles. Not so everyone else.

So happy autumn. Let's hope the scariest element of this season will be Halloween.